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Monday, August 18, 2014

Abe Briloff, Watchdog Extraordinaire, Admitted into Hall of Fame

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Someone writing about a company's accounting is not often followed by the company's stock price diving right after that someone's tough appraisal of the company's financial reporting appears in print.

That's what happened- many times - with the writings of Abe Briloff, who was inducted posthumously into the Accounting Hall of Fame earlier this month. Briloff, an accountant, professor of accounting at Baruch College and accounting watchdog extraordinaire, died at the age of 96 in December. 

Evidence studied in research "indicates that companies whose accounting practices are criticized by Briloff suffer (on average) a price drop of approximately 8 percent on the day the article is published," Stanford's George Foster wrote in an article published in the spring 1979 volume of the Journal of Accounting Research.  Foster's findings were based on his study of columns Briloff had written for Barron's.

As The New York Times noted in its obituary of Briloff on Dec. 15, 2013, the Barron's articles "turned him into something of a celebrity, revered by investors and vilified but also respected by companies and their accounting firms."

Briloff's impact on a share price could last longer than the affected company cared to see, The Times suggested. The newspaper cited a 2004 article in Financial Analysts Journal by Hemang Desai and Prem Jain. "Our results indicated that Briloff was better able to foresee the coming decline in performance than the market, on average," the authors wrote in their study of the accounting critic's work.

Information for All to See, But Not for Briloff.

In a tribute last December in The New York Times, Floyd Norris, the paper's chief financial correspondent and a former editor of Briloff's columns at Barron's, noted the accountant-professor's exceptional ability to recall the details of publicly available financial statements - down to the number of a revealing (or even incriminating) footnote disclosure. The information was there for all to see.

All to see, but not for Briloff. The famed (or notorious, depending on the viewer) watchdog was legally blind, as Norris and others noted.

"It was memory," Norris said in his speech on Briloff at the August meeting of the American Accounting Association at an event to mark the critic's induction and others' into the Accounting Hall of Fame. "He did not read the financial reports he dissected and then blasted. Instead, he had them read to him, often by graduate students."

Norris added that he suspects at least some of the students learned much from listening to Briloff's responses to what he heard. "I know I did," he said.

A Taking to Task: Waste Management and its Auditor.

In the December obituary, The New York Times highlighted Briloff's 1992 reading of Waste Management, Inc.'s reporting and of the audit work by Arthur Andersen. Briloff cited improper depreciation of landfill sites to boost Waste Management's earnings. The corporation's CFO and Andersen took issue - vigorously,The Times recalled.

A decade later, the Securities and Exchange Commission filed an action against Waste Management and its chief financial officer. Securities regulators said that the managers had carried out "a massive financial fraud" that started in 1992, the year Briloff's critical column appeared, as the newspaper noted.

Andersen paid $7 million - a record at the time - to settle an SEC antifraud action over Waste Management's alleged $1 billion-plus overstatement of pre-tax income (118 DER A-1, 6/20/01). The Big Five accounting firm later went out of business over its work for Enron, leaving today's Big Four count.)

Briloff observed what he regarded as serious flaws in certain accounting standards. Those included the long-standing pooling-of-interests method of accounting for business combinations. The Financial Accounting Standards Board spelled the end of "poolings" in rules published in 2001, as Norris noted.

"Abe is gone now," Norris said at the early morning induction ceremony at the AAA meeting in Atlanta, "and the accounting rules are better, thanks in part to him."

Robert Swieringa, a former FASB member and dean emeritus of Cornell University's Johnson School of Management, told me Aug. 9 that "Abe's articles created a lot of angst for companies and accounting firms and organizations, but those articles provided context for many of the accounting debates of the day."

A Trip to the FASB.

Swieringa remembered a day that Briloff spent at the FASB's offices in Norwalk, Conn. He took a train from New York to South Norwalk, without assistance, and was picked up there by a FASB staff member. Briloff spent the day talking with various people at the board, individually and in groups. He boarded another train later that day and returned to New York, "again without assistance," Swieringa recalled. "A truly remarkable man."

 

 By Steve Burkholder, Bloomberg BNA Staff Correspondent              

 

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